Comment by the CEO

Amid a flurry of changes for Banca IFIS at such a challenging time, 2014 was a record year that saw strong growth. Key indicators are steadily improving, consistently with our intention to provide as much resources as possible to the economy.

While always ensuring sustainable growth, the Bank managed to increase its support to a rising number of companies and households, effectively using its capital position, liquidity, and ability to offer solutions. This achievement came against a deeply negative backdrop; in spite of a restrictive regulatory environment; and amid a radical overhaul of our operations, with the goal of making our growth more stable and consistent in the coming years.

The Bank increased its lending as it improved a credit quality that was already remarkably good to begin with, confirming the soundness of its approach. An achievement all the more important considering that in general Italian banks are struggling to both expand their support to businesses and households as well as keeping impaired and bad loans in check.

The data concerning Banca IFIS's credit quality as far as lending to businesses is concerned point to an outstanding performance: net bad loans accounted for just over 1% of trade receivables, with the proportion halving once again year-on-year; the bad loan coverage ratio reached a staggering 86,4%, outperforming the banking industry; total impaired loans amounted to less than 30% of equity, another unique achievement. These results, made possible thanks to the ability of promoting healthy lending and optimally managing distressed situations, show a bank that was able to weather the storm, quickly mend the damage by changing and innovating, and promptly resume its course.

We are growing rapidly: lending to businesses soared 26,7%, with the Bank improving its quality and profitability; in the segment of impaired loans from other originators, Banca IFIS brought the number of loans under management to over 775 thousand, with an overall par value of 5,6 billion Euro and an average book value slightly above 2%; in the tax receivables segment, it confirmed its leadership in the domestic market, with lending and profitability rising further. Therefore, throughout 2014 the Bank posted record volume growth in all segments where it operates as a lender.

These staggering volumes did not come at the expense of margins: all segments still present strong rates of return on loans (which are short-term in the case of businesses, and medium- or long-term when purchasing impaired loans or tax receivables). Rising volumes and margins show that the Bank's offering is appreciated by the markets it operates in, which is a necessary condition to continue performing well over time while supporting the surrounding economic environment.

Profitability was still affected – although to a gradually decreasing extent – by the margins on the government bond portfolio. By stopping purchases in late 2013 due to the narrowing of margins on new securities, the Bank ended up with a massive but rapidly shrinking portfolio: during 2014 alone, its book value fell from 8,4 to 5,1 billion Euro, and it is expected to contract further over the next four years until it is completely disposed of, absent new purchases which currently cannot be anticipated. A major focus was managing the portfolio's refinancing costs, and the Bank successfully curbed financial expenses. Towards the end of the year, it was able to refinance the government bonds posted as collateral at fractionally negative interest rates.

Another highlight in 2014 was the falling cost of funding. Collateralised interbank lending rates dropped to zero, and there was a dramatic reduction also in the returns on retail deposits, lowering the cost of money for the Bank. The average cost of retail funding raised through rendimax and contomax fell in just one year by 1,08%. Volumes were moderately down, and this was intended (with customers weighing risks against returns), but they still largely exceeded loans to businesses and households.

In the Bank's vision, the gradually diminishing return on the government bond portfolio was and will continue to be offset first by the falling cost of funding, and then by the steadily growing margins in all segments that see the Bank supporting the economy. In this sense, the rising business lending volumes were and will be key – a result made possible thanks to the Bank's current and future level of equity, raising capital through retained earnings. Another factor was the improved credit quality, with the cost of risk falling to 145 basis points in 2014 and expected to shrink further, especially in the event the economy does not deteriorate further. The Bank also has high expectations concerning the medium-term outlook for impaired loans from other originators. In 2014, this segment further refined its operational processes. It will take time for the result to show up on the bottom line due to the length of the portfolio's management cycle, but we expect cash flows to significantly improve over time, making an increasing contribution to the Bank's volumes and margins.

This is the backdrop against which Banca IFIS managed to achieve the results reported in this document. Let us stress that shareholders will see a 23,5% return on invested capital, in line with expectations, and that profitability never came in below 20% over the last 3 years.

We deeply believe that there cannot be such a thing as a bank operating without considering the situation it acts on. We believe that banking means striking a balance between the interests of the people who use the bank’s services and the ambition to achieve the right level of remuneration. A bank which merely profits from a system that reluctantly allows it to do so, just as a bank which fails to keep its business on track when faced with adverse market conditions, are, for different reasons, doomed to fail. Our work is inspired by the principle of bringing objective improvements to all stakeholders. We are determined to continue making an impact on the real economy. We know we play an important role and have the responsibility to do so to the best of our ability, in the interest of our customers, our shareholders, our people, and all those who work alongside us.